For a few months after demonetisation in 2016, it seemed like Paytm was on the cusp of dominating the digital payments phase in the country. But now, it is in danger of losing the market dominance by newer apps, even as cash remains the preferred choice of many Indians.
Though digital payments are still expected to grow to $1 trillion by 2023 compared with $200 billion in 2018, according to a 2018 Credit Suisse report, digital wallets, where Paytm has established a monopoly, may soon become obsolete. Growth in digital payments is now being led by the Unified Payments Interface (UPI) platform.
Walmart-owned PhonePe and Google Pay, the search giant’s payment app, have recorded more transactions on UPI than Paytm. So in the world of UPI payments, Paytm has to amend its business plan.
Digital payments are mainly categorised into people to people payments and offline merchant payments which have become a key battleground in digital payments. Paytm is now focusing on offline merchants rather than person to person money transfer as the margins are less. Monopolising offline merchant space is the key now.
Peter Thiel in his best selling book Zero to One quoted -
Companies that create an enduring monopoly (a moat around their castle, so to speak) have these four characteristics: proprietary technology, network effects, economies of scale or branding.
I feel these four characteristics provide a good template for analysing the company and learn where to improve.
Proprietary Technology:
The company relies heavily on the internet. Waiting till internet penetration goes up in the country takes time and is not worth waiting as other competitors may overtake. The only solution here is enabling proprietary technology for the merchants. Paytm has come up with a Paytm Soundbox is a sim enabled IOT device to make app less digital transactions. In simpler words, the Paytm SoundBox will alert you that the payment is complete, instead of waiting for an SMS.
If we can capture the whole merchant market (including small shops), we will be able to hold the massive migration to the competitors, the likes of GPay and PhonePe.
There are 14 million retail outlets in the country. That is about 11 shop outlets for every 1000 people. If we can capitalise on these 14 million outlets using SoundBox which is our proprietary technology, we will be able to stop user migration the dominate and monopolise this market. Even if the competitor comes up with similar technology, having two different sound boxes in the same shop it is not convenient (just 4% of the shops in India are larger than 500 sq. ft in size).
Network effects and financial inclusion:
A network effect is a phenomenon by which the value or utility a user derives from a good or service depends on the number of users of compatible products. WhatsApp, the messaging service owned by Facebook. WhatsApp launched payments on trial for some of its users in February 2018. Industry executives say WhatsApp’s entry into the payments space will transform the sector as it is the most widely used app in India. 340 million Indians are on WhatsApp. The network effects of WhatsApp is a threat to Paytm. It needs to make sure it is a step ahead of WhatsApp (as of now, it is).
Financial inclusion is an initiative that seeks to include residents who have no access to banks or who can’t afford the required minimum deposits in the digital banking era.
An Indian start up called FamPay claims to be India’s first payment app for teenagers and their families. With FamPay, minors can do UPI, P2P and card payments without the need to set up a bank account. FamPay allows parents to send money to their kids below the age of 18. This is an untapped market with very little competition. "The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors." (Peter Thiel in his book Zero to One).
A payment app for where numberless cards, minors can successfully make online (UPI & P2P) and offline payments without the need to set up a bank account. With the rise of financial awareness in Indians, this is another great opportunity to make people involved in the Paytm ecosystem. "It’s not a company but an ecosystem of companies and businesses'', said Vijay Sharma (the CEO of Paytm). Paytm can acquire this startup or start building similar products of its own and dominate this newly created niche.
Another untapped space is college-going students. Entertainment companies such as Spotify, Apple Music and Youtube have started giving discounts for college-going students in some of their paid subscriptions. It is estimated that India has around 88.4 million college students. We can give them more cash backs than others, once their college status is verified. College students LOVE cashbacks. And giving them an extra priority for cashbacks and certain offers, the company can easily dominate this space. Students feel extra special and their loyalty to the brand increases. Research shows that younger consumers engage more through loyalty programmes and personalised products. That's 88.4 million potential users!
Economies of scale and branding:
Economies of scale are the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing which causes scale increasing. Paytm spent Rs 3,451 crore on advertising and promotional expenses. These marketing and promotion costs account for 47 percent of all of Paytm’s total expenses. Paytm has accounted for these costs under ‘marketing and business promotion expenses’ and advertisement. For long-term sustainability, companies need to build innovative, creative and smarter models so that cashbacks can be monetised as research shows that younger consumers engage more through loyalty programmes, and personalised products. After drawing in millions of customers by offering cashbacks, the company can persuade them to take loans, buy insurance and spend on wealth management services on the platform—all of which offer higher margins than plain digital payments. From a payments company, we can slowly transition into asset management and financial services company to make profits. The number one priority here is user retention.
Marketing spend for the company needs to be invested across all platforms, the key areas of focus being ATL (Above The Line) marketing which includes widespread aggressive brand-building activities, BTL (Below The Line) marketing which happens to be a form of targeted direct marketing focused mainly on conversions and last but not the least digital marketing.
Consumer loyalty:
Customer loyalty is another important aspect of a company. According to the Harvard Business Review, it costs a business 5-25 times more to acquire a new customer than it does to sell to an existing one. On top of that, Inc. Magazine notes that existing customers spend 67% more than new customers. Clearly, customer loyalty pays off. 73% of loyalty program members are more likely to recommend brands with loyalty programs they like and use and 64% of the affluent middle class belong to a grocery store customer loyalty program to save money. Customer loyalty is everything. The three R's of customer loyalty: Rewards, Relevance, and Recognition. Rewards and Relevance are already implemented in the company's culture (actually every company's culture). The key differentiator will be Recognition. Recognise the customer. This can be done through better deals, tiered rewards for increasing loyalty, and by welcoming them as part of a special community. Paytm has a loyalty program called "Paytm First '' but is not known to many and is relatively inactive. We can boost this. Offers must not only include online businesses but with these loyalty programs, discounts with offline merchants can also be included.
"Our job is to find a synthesis between our vision and what customers will accept, not just to capitulate" - Eric Ries in his bestseller "The lean startup”.
Top 25 Million instead of the Next Billion?
This approach can be a little counterintuitive in the Indian startup space where all startups are focusing on changing the lives of what they call it - "the next billion Indians". Basically, they’re trying to go for 100 million customers when many of the customers don’t have the money to afford the basics. India has approximately $2,000 per capita income. If you remove the top 25 million families, that would drop to less than $800 per capita, which is 50,000 rupees a year [683 dollars]. Everybody is building for the 100 million who have no money. Why not focus on the top 25 million Indians? The country is probably going to be built by cohorts of 20 to 25 million people each. Make a product for them. It may be a new loyalty program or a competitor to CRED. I'm not sure about the idea or how to implement it, but it is a factor that many entrepreneurs in the country are missing out on and is worth pondering upon.
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Sources and references:
https://dazeinfo.com/2020/02/18/paytm-phonepay-marketing-budget-2020/
https://www.jagranjosh.com/general-knowledge/fampay-launched-famcard-1595831388-1
https://www.investopedia.com/terms/m/mpesa.asp
https://business.hughes.com/sites/business.hughes.com/files/2020-04/Customer Loyalty_H64688_033020_FINAL_0.pdf